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Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-13554             February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
UNIVERSITY OF THE VISAYAS, respondent.

Office of the Solicitor General for petitioner.
Janario T. Seno and Amado Seno for respondent.

PADILLA, J.:

This is a petition filed by the Collector of Internal Revenue under section 18, Republic Act No. 1125, for review of a judgment rendered on 22 January 1958 by the Court of Tax Appeals, holding that the University of the Visayas (formerly Visayan Institute) is exempt from payment of income tax under the provisions of section 27(e) of the National Internal Revenue Code and that the assessments for income tax made by the petitioner for the years 1946 to 1950, inclusive, in the total sum of P46,592.03, exclusive of surcharges, penalties and interests are null and void, and ordering the petitioner to refund to the respondent the sum of P13,811.31 for income tax erroneously paid by the respondent (C.T.A. Cebu civil case No. R-3434).

The respondent did not file with the Bureau of Internal Revenue returns of net income for the years, 1949 to 1950, inclusive. After investigation conducted by an examiner of the Bureau of Internal Revenue, the examiner filed returns of respondent's net income for the said years based upon the profit and loss statements shown and submitted to the examiner by the respondent's accountant (Exhibits 7, 7-A, 7-B, 7-C, 7D, G, G-1, G-2, G-3, G-4). On 3 and 8 September 1951, the petitioner assessed the respondent for income received during the years 1946 to 1950, inclusive, and the tax due thereon, surcharges and penalties, computed as follows: .

1946:
Net income as per return ................................................	P27,893.52
Add: Book binding disallowed ........................................	7,064.00
Net income as per investigation ....................................	P 34,957.52
Tax due at 12% ..................................................................	4,194.90
25% surcharge .................................................................	1,048.72
TOTAL AMOUNT DUE ...............................................	P 5,243.62
1947:
Net income as per profit and loss statement .............	P63,070.24
Add: Book binding ............................................................	7,120.70
Depreciation ......................................................................	6,306.00
Net income as per investigation ....................................	76,496.94
Tax due at 12% ..................................................................	9,179.63
25% surcharge .................................................................	2,294.90
TOTAL AMOUNT DUE ...............................................	11,474.53
1948:
Net income as per profit and loss statement ..............	53,387.62
Add: Book binding .............................................................	7,977.16
Depreciation disallowed ........................................	10,341.60
Net income as per investigation ....................................	P71,706.38
Tax due at 12% ..................................................................	8,604.77
25% surcharge .................................................................	2,151.19
TOTAL AMOUNT DUE ...............................................	P10,755.96
1949:
Net income as per investigation ....................................	P109,156.06
Tax due at 12% ..................................................................	13,098.73
25% surcharge .................................................................	3,274.68
TOTAL AMOUNT DUE ...............................................	P16,373.41
1950:
Net income per profit and loss statement ...................	P48,971.58
Add: Depreciation disallowed ........................................	22,990.98
Total net income per investigation ...............................	P71,962.56
16% tax due ......................................................................	11,514.00
25% surcharge .................................................................	2,878.00
Compromise ....................................................................	20.00
TOTAL AMOUNT DUE ...............................................	P14,412.00

(pp. 221-222, 204, BIR rec.). Assessments Nos. A-R 12369650/46, 123697-50/47, 123698-50/48, 123699-50/49 and 123700-50/50 were sent to the respondent (pp. 183, 179, 175, 172, 202, BIR rec.). On 1 and 2 December 1951 the respondent sent telegrams to the petitioner requesting that it be allowed to pay the taxes, surcharges and penalties by installment at the rate of P1,000 a month a (pp. 223-224, BIR rec.) On 10 December 1951 the petitioner replied that the respondent could settle its obligation to the Government by paying it in twelve monthly installments at the rate of P5,809.02 per month, the first installment due and payable on or before 15 January 1952, provided that the respondent would file a surety bond on or before 10 January 1952 to insure payment thereof (Exhibit 11, pp. 226-227 BIR rec.). On 17 December 1951 the respondent paid P1,000 on account of the tax assessed against it (Exhibits D and 12, pp. 52-53, CTA rec; 230-231, BIR rec.). On 24 January 1952 the respondent wrote a letter dated 22 January 1952 addressed to the petitioner requesting that the 25% surcharge imposed for non-payment of income tax be eliminated because its failure to file income tax returns for the years 1946 to 1950 and to pay income tax thereon was due to the honest belief that private schools were exempt from taxation (pp. 227-228, BIR rec.). On 31 January 1952 the petitioner granted the respondent's request for elimination of the 25% surcharge and reduced to P4,603.77 the monthly installment to be paid by the respondent, provided that the first installment would be due and payable on or before 29 February 1952 and that the surety bond to insure payment would be filed by the respondent on or before the said date, 29 February 1952. The previous assessments were amended as follows:

1946 Income tax due per investigation ............................	P4,194.90
1947 Income tax due per investigation ............................	9,179.63
1948 Income tax due per investigation ............................	8,604.77
1949 Income tax due per investigation ............................	13,098.73
1950 Income tax due per investigation ............................	11,514.00
Total ........................................................................................	P46,592.03
5% surcharge .......................................................................	2,329.60
1% mo. int. from 9/30/51 to 12/17/51 ...............................	1,195.86
Total amount due on 12/17/51 (w/out compromise) ....	50,117.49
Less: amt. pd. on 12/17/51 under O.R. 357822 ............	1,000.00
Balance as of 12/17/51 (w/out compromise) .................	P49,117.49
1% mo. int. on P45,592.03 from 12/17/51 to 1/31/53 ...	5,987.75
Compromise for late filing (P20.00 each year) .............	100.00
Compromise for late payment .........................................	40.00
TOTAL AMOUNT DUE ON 1/31/53 ........................	P55,245.24

(Exhibits D and 12, pp. 52-53, CTA rec.; 230-231, BIR rec.) On 29 February, 3 April and 5 May 1952, the respondent paid to the City Treasurer of Cebu the monthly installment at the rate of P4,603.77, or the total sum of P13,811.31 (Exhibits A, B, C).

On 1 March 1954 the respondent wrote to the petitioner requesting that the amount of P1,000 (paid on 17 December 1951, O.R. No. 357822, see Exhibits D and 12) and P13,811.31, or a total of P14,811.31, be refunded to it on the ground that being a corporation organized and operated exclusively for educational purpose, it was exempt from the payment of income tax (p. 235, BIR rec.). On the same day, 1 March 1954, the respondent brought an action against the petitioner in the Court of First Instance of Cebu for recovery of the sum of P14,811.31 (civil No. R-0434). On 7 April 1954 the petitioner filed his answer to the complaint with counterclaim. After the enactment into law of Republic Act No. 1125 on 16 June 1954, upon motion of the Assistant Provincial Fiscal, on 6 November 1954 the Court of First Instance of Cebu certified the case to the Court of Tax Appeals pursuant to the provisions of section 22, in connection with section 7, Republic Act No. 1125. After hearing, on 22 January 1958 the Court of Tax Appeals rendered judgment, the dispositive part of which is as stated at the beginning of this opinion. On 8 March 1958 the petitioner filed a notice of appeal in the Court of Tax Appeals and on 20 March 1958, within the extension of time previously granted, a petition for review in this Court.

Section 27(e) of the National Internal Revenue Code, as amended, the provisions of law involved in the case at bar, provides: .

The following organizations shall not be taxed under this Title in respect to income received by them as such —

x x x           x x x           x x x

(e) Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans no Part of the net income of which inures to the benefit of any private stockholder or individual: Provided, however, That the income of whatever kind and character from any of its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to the tax imposed under this Code; .

A corporation or association claiming exemption from the payment of income tax as provided for in the aforequoted provision of law, must show that it is organize and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans and that no part of its income inures to the benefit of any private stockholder or individual.

The petitioner claims that the respondent is a corporation organized for profit which inures to the benefit of Vicente Gullas, its president. The respondent denies the petitioner's claim.

In Collector of Internal Revenue vs. V. G. Sinco Educational. Corporation, 53 Off. Gaz. 2470, the facts are: In June, 1949 Vicente G. Sinco established and operated an educational institution known as Foundation College of Dumaguete. On 21 September 1951, in view of the requirement of the Department of Education that as far a practicable, schools and colleges recognized by the government should be incorporated. Vicente G. Sinco and the members of his immediate family organized a non-stock corporation known as the V.G. Sinco Educational Institution Inc., which was capitalized by Vicente G. Sinco an the members, of his immediate family. Vicente G. Sinco acted as chairman of the board of directors and president of the college and in 1949 as a part time teacher but did not collect his salary. The college derived its income solely from the tuition fees paid by students enrolled and realized profits out of its operation but did not distribute any dividend or profit to its stockholders. Part of its income was spent in acquiring additional buildings and equipment. In upholding the corporation's claim that under the provisions of section 27 (e) of the National Internal Revenue Code, it is exempt from the payment of income tax because it is organized and maintained exclusively for educational purposes and no part of its income inures to the benefit of any individual or stockholder, this Court said: .

. . .The fact is that, as it has been established, the appellee is a non-profit institution and since its organization it has never distributed any dividend or profit to its stockholders. Of course, part of its income went to the payment of its teachers or professors and to the other expenses of the college incident to an educational institution but none of the income has ever been channeled to the benefit of any individual stockholder. The authorities are clear to the effect that whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit is would make the school one conducted for profit. Thus, in the case of Mayor and Common Council of Borough of Princeton vs. State Board of Taxes & Assessments, et al., 115 Atl. 342, wherein the principal officer of the school was formerly its owner and principal and as such principal he was given a salary for his services, the court held that school is not conducted for profit merely because moderate salaries were paid to the principal and to the teachers.

Of course, it is not denied that the appellee charges tuition fees and other fees for the different services it renders to the students and in fact it is its only source of income, but such fact does not in itself make the school a profit-making enterprise hat would place it beyond the purview of the law. In this connection this Court made the following comment: .

"Needless to say, every responsible organization must be so run as to, at least, insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus. Upon the other hand, appellant's pretense, would limit the benefits of the exemption, under said section 27 (e), to institutions which do not hope, or propose, to have such surplus. Under this view, the exemption would apply only to schools which are on the verge of bankruptcy, for - unlike the United States, where a substantial number of institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund of which has been steadily increasing with the years there are, and there have always been, very few educational enterprises in the Philippines which are supported by donations, and these organizations usually have a very precarious existence. The final result of appellant's contention, if adopted, would be to discourage the establishment of colleges in the Philippines, which is precisely the opposite of the objective consistently, sought by our laws.

"Again, the amount of fees charged by a school, college or university depends, ultimately, upon the policy and a given administration, at a particular time. It is not conclusive of the purposes of the institution. Otherwise, such purpose would vary with the particular persons in charge of the administration of the organization." (Jesus Sacred Heart College vs. Collector of Internal Revenue, G.R. No. L-6807, May 24, 1954.) .

Another point raised by appellant to show that appellee is not entitled to the exemption of the law refers to the use made by it of part of its income in acquiring additional buildings and equipment which, it is claimed, would in the end to redound to the benefit of its stockholders. Appellant claims that "By capitalizing its earnings in the aforementioned manner, the value of the properties of the corporation was enhanced and, therefore, such profits inured to the benefit of the stockholders or members. The property of the corporation may be sold at any time and the profits thereof divided among the stockholders or members." .

This claim is too speculative. While the acquisition of additional facilities may redound to the benefit of the institution itself, (it) cannot be positively asserted that the same will redound to the benefit of its stockholders, for no one can predict the financial condition of the institution upon its dissolution. At any rate, it has been held by several authorities, that the mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. Thus, in the case of U.S. vs. Pickwick Electric Membership Corp., 158 F. 2d 272, 277, it was held-"The mere fact that the members may receive some benefit on dissolution upon distribution of the assets is a contingency too remote to have any material bearing upon the question where the association is admittedly not a scheme to avoid taxation and its good faith and honesty of purpose is not challenged." (pp. 2473-2475.) .

Sometime in 1919, Vicente Gullas established a school in Cebu City known as the "Visayan Institute" and for a few years remained its sole owner. On 1 October 1921 Vicente Gullas, Pantaleon E. del Rosario, Paulino Gullas, Manuel C. Briones and Eugenio S. del Rosario formed a non-stock corporation with an authorized capital of P20,000 for the purpose of establishing and maintaining a school to be named as the "Visayan Institute" [(Exhibits 1, 1-A, pp. 193 (i) to 193 (k) ]. The plan was to finance the school by selling to the public bonds with a par value of P100 each payable out of the funds of the corporation and the interest to be fixed by the by-laws. However, the financing plan was abandoned and instead of selling bonds to the public, Vicente Gullas and his wife "put in" their "own money." On 29 August 1930 the Visayan Institute amended its articles of incorporation by converting it into a stock corporation with an authorized capital of P50,000, subscribed and paid as follows by: .

Name	No. of Stocks Subscribed	Amount Paid
Pantaleon E. del Rosario ..........	70	P 7,000
Eugenio S. del Rosario ..............	70	7,000
Manuel C. Briones ......................	70	7,000
Paulino Gullas .............................	70	7,000
Vicente Gullas ..............................	220	22,000

According to the amended articles of incorporation, all shares of the corporation had been subscribed and paid for (Exhibits 2, 2-A, E, E-2, pp. 193 [f] to 193 [h]). In March 1949 the Visayan Institute was raised to the category of a university and renamed "University of the Visayas."

Vicente ' Gullas, president of the respondent, testified that the respondent is not engaged in a profit-making enterprise but in a purely educational pursuit; that the sources of income of the respondent are the various fees paid by the students like annual fee, book rental, etc.; that those receipts are spent for salaries of the teachers, repair of the buildings, purchase of library books and athletic equipment, scholarship funds and contributions to charity; that while the respondent realizes profit out of its operation, the profit goes to the improvement and repurchase of library books and equipment, establishment of scholarship funds, and musical instruments; that since its original incorporation, no dividends have been declared and distributed to the stockholders; and that as president of the respondent, he receives a salary of Pl,000 a month and P300 a month allowance for transportation, representation and entertainment.

Teofilo Castillejo, accountant of the respondent, testified that the income of the respondent is derived only from admission, tuition, diploma, ROTC and laboratory fees paid by the students; that no dividends have been distributed to its stockholders since its incorporation; and that the net income of the respondent remains as surplus in its book of accounts.

Juan Gandiongco, at present chief of the Collection Branch, BIR Regional District No. 7, and from 1934 to end of the war and from 1946 to 1951, was an income tax examiner, testified that sometime in 1941 he examine the books of account of the Visayan Institute and submitted a report of examination to the chief of the Income Tax Division; and that in the course of his examination of its books of account, he found that at no time from 1920 to 1941 did the Visayan Institute declare any stock or cash dividend. Zacarias Chua, Group Supervisor in the Bureau of Internal Revenue and income tax examiner, and from 1946 to 1951 was stationed in Cebu City, testified that in 1951 he had occasion to examine the books of account of the Visayan Institute or the University of the Visayas; and he did not find any declaration and payment of case dividend to its stockholders. At present, the stockholders of the corporation and respective shareholding and investment are:

Name	No. of Shares	Amount
1. Atty. Vicente Gullas .................................	200	P20,000.00
2. Atty. & Mrs. Vicente Gullas .....................	90	9,000.00
3. Senator Manuel C. Briones ..................	65	6,500.00
4. Atty. Vicente del Rosario .......................	30	3,000.00
5. Dr. Rosario Gullas-Cruz .......................	30	3,000.00
6. Atty. Braulio K. Oro & Alberto Pusod ....	5	500.00
7. Mr. Jose R. Gullas ..................................	15	1,500.00
8. Mr. Eduardo R. Gullas ............................	15	1,500.00
9. Miss Gliceria R. Gullas ..........................	15	1,500.00
10. Mrs. Josefina R. Gullas .......................	15	1,500.00
11. Mr. Felicisimo Cabusas ......................	5	500.00
12. Pres. U. V. Alumni Association ...........	5	500.00
13. Atty. Hipolito Alo .....................................	5	500.00
14. Sabas Ramirez .....................................	5	500.00
		P50,000.00

(Exhibit 15, p. 310, BIR rec.). The following is a list of stockholders employed by and receiving compensation from the respondent:

Year 1946
1. Atty. Vicente Gullas, President .............................	P3,000 July to December 1946
2. Dr. Rosario G. Cruz, Secretary ............................	750 July to December 1946
Year 1947
1. Atty. Vicente Gullas, President ............................	P6,600 Jan. to December 1947
2. Dr. Rosario G. Cruz, Secretary ............................	1,200 Jan. to December 1947
3. Mrs. Josefina R. Gullas, Treasurer ....................	650 Jan. to December 1947
Year 1948
1. Atty. Vicente Gullas, President ............................	116,600 Jan. to December 1948
2. Mrs. Josefina R. Gullas, Treasurer ....................	2,421 Jan. to December 1948
3. Dr. Rosario G. Cruz, Secretary ............................	1,200 Jan. to December 1948
Year 1949
1. Atty. Vicente Gullas, President ............................	P12,000.00 Jan. to December 1949
2. Mrs. Josefina R. Gullas, Treasurer ...................	3,000 Jan. to December 1949
3. Hon. Vicente del Rosario, Instructor .................	375 Jan. to December 1949
Year 1950
1. Atty. Vicente Gullas, President ...........................	P12,000 Jan. to December 1950
2. Mrs. Josefina R. Gullas, Treasurer ...................	4,200 Jan. to December 1950
(Exhibit 16, p. 290, BIR rec.).

The respondent has satisfactorily established its claim that it is organized and operated exclusively for educational purposes and that no part of its income has inured to the benefit of any stockholder or individual. The original articles of incorporation of the respondent states —

That the purpose for which such corporation is formed is for the upbuilding and development of the mind and body of the Filipino youth, and to promote that which is helpful and beneficial to the moulding of their character. To accomplish this end, the corporation shall establish and maintain, to begin with, a high school course, a school of law and of commerce, and may also establish sometime in the future some other institutions of learning such as colleges of education, medicine, engineering etc. (Exhibit 1)

and its amended articles of incorporation state —

That the purpose for which such corporation is formed is to give to the Filipino youth such training and instruction which may make them well-prepared to honorably exercise the rights and to perform and discharge the duties and obligations of good, patriotic and useful citizen. The corporation will direct it efforts to the symmetrical development of their character, mind and body. To accomplish this end, the corporation will establish and maintain, to begin with, a high school or secondary course of instruction, a college of commerce and business administration and a college of law. In the future, when the conditions warrant it, the corporation may open, establish and maintain additional courses, schools, and colleges, such as: college of liberal arts, college of education, college of engineering, college of dentistry and pharmacy, college of medicine and surgery, etc. (Exhibit E-1)

The above quoted purposes of the respondent show that it is engaged in an educational endeavor and in no other. The profit and loss statements of the respondent for the years 1946 to 1950, inclusive, show that its income was solely derived from admission fees, tuition fees, diploma fees, graduation fees, ROTC fees and laboratory fees paid by the students (Exhibits G, G-1, G-2, G-3, G-4).

The fact that the original articles of incorporation was amended to convert the corporation from a non-stock to a stock corporation is not a conclusive proof that the respondent is engaged in a profit-making business, part of which inures to the benefit of a single stockholder or individual. As correctly held by the Court of Tax Appeals, "Section 27(,e) of the National Internal Revenue Code does not make any distinction between stock and non-stock corporations, and it is not for this Court to make the distinction."

The fact that when on 29 August 1930 the corporation was converted from a non-stock to a stock corporation, "its assets had increased from P6,000.00 cash and P3,000.00 worth of books (t.s.n., p. 23) into assets worth P50,000.00, which were distributed in the form of shares of stock to the members of the non-stock corporation, predecessor of the stock corporation (Exhibit 2, p. 13 h Vol. 1, BIR rec.);" and that at the meeting of the Board of Trustees of the respondent held on 12 February 1950, there was a move to double the stock dividend of the corporation "in view of P200,000 gain in property — real and personal besides the goodwill," which was not actually carried out (Exhibits 3-B, 3-C, p. 39, BIR rec.), is not enough for an inference that the respondent has been turned into a corporation for business and profit. The fact is that since its incorporation, the respondent has not declared any cash dividend and no part of its profits has inured to the benefit of any stockholder or individual. The mere realization of profits out of its operation does not automatically result in the loss of its privilege of exemption from the payment of income tax as long as no part of its profits inures to the benefit of any stockholder or individual.

The petitioner's claim that the respondent has invested in other schools established in Toledo, Danao, Sogod, Colon, Sibonga and Cebu City is denied by Vicente Gullas, president of the respondent, who testified that the respondent is merely supervising these schools and does not receive any fee for such- that the only benefit the respondent derives in return is the encouragement of the graduates of the supervised schools to enroll in the respondent; that it is the witness himself who supervises them and receives remuneratrion for his services and not the respondent; and that although at the meeting of the board of trustees of the respondent held on 12 February 1950, there was a move to require the Toledo Colleges, Danao Colleges and Cebu Northern High School to give the respondent 5o/o of their admission fees. and 10% of their graduation fees as remuneration for checking their financial account and for advertising their schools, yet the board of trustees had hot been able to compel them to do so because the supervised schools stood "on their own and not directed by the University of the Visayas" and that "they pay directly their fees to Manila or they cannot get graduation special order or when there is a contribution for girl scouts or boy scouts or for the anti-T.B., they later pay thru the University of the Visayas."

Neither the fact that there was an offer to purchase the assets of the University of the Visayas for the sum of P4,000,000, which means that the stockholders' original investment of P1 is now worth P119, nor the fact that the respondent's profits are being kept for future distribution to stockholders would deprive the respondent of the privilege of exemption. As long as it continues to engage solely in the operation and maintenance of the school and no dividend inures to the benefit of any stockholder or individual, the respondent would enjoy the exemption from the payment of income tax provided for in section 27(e) of the National Internal Revenue Code.

The action for refund, as far as the sum of P1,000 paid by the respondent on 17 December 1951 is concerned, is already barred., The respondent does not insist on asking for the refund of this sum. And as far as the action for refund of the sum of P4,603.77 paid by the respondent on 29 February 1952 is concerned, the Court of Tax Appeals correctly ruled that it is not barred, because as the last day of the two-year period (28 February 1954) within which an action may be brought in court for its refund, as provided for in section 306 of the National Internal Revenue Code, fell on Sunday, the action for refund brought by the respondent in the Court of First Instance of Cebu on the following day, to wit: 1 March 1954, was within the statutory period. The action for refund of P4,603.77 paid on 2 April, and of an equal amount paid on 5 May 1952, by the respondent, is obviously within the statutory period.

The judgment under review is affirmed, without pronouncement as to costs.

Bengzon, Actg. C.J., Bautista Angelo, Labrador Concepcion, Reyes, J.B.L., Barrera, Paredes and Dizon, JJ., concur.

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